The Russell 2000 (^RUT) is home to many small-cap stocks, offering investors the chance to uncover hidden gems before the broader market catches on. However, these companies often come with higher volatility and risk, as their smaller size makes them more vulnerable to economic downturns.
Picking the right small caps isn’t easy, and that’s exactly why StockStory exists - to help you focus on the best opportunities. Keeping that in mind, here are three Russell 2000 stocks to steer clear of and some alternatives to watch instead.
ACV Auctions (ACVA)
Market Cap: $903.7 million
Founded in 2014, ACV Auctions (NASDAQ:ACVA) is an online auction marketplace for car dealers and wholesalers to buy and sell used cars.
Why Are We Wary of ACVA?
- Bad unit economics and steep infrastructure costs are reflected in its low gross margin of 27.1%
- Excessive marketing spend signals little organic demand and traction for its platform
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
ACV Auctions is trading at $5.18 per share, or 11.1x forward EV/EBITDA. To fully understand why you should be careful with ACVA, check out our full research report (it’s free).
Vestis (VSTS)
Market Cap: $1.28 billion
Operating a network of more than 350 facilities with 3,300 delivery routes serving customers weekly, Vestis (NYSE:VSTS) provides uniform rentals, workplace supplies, and facility services to over 300,000 business locations across the United States and Canada.
Why Do We Steer Clear of VSTS?
- Annual sales declines of 2.6% for the past two years show its products and services struggled to connect with the market during this cycle
- Earnings per share have contracted by 32.7% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
- High net-debt-to-EBITDA ratio of 6× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $9.72 per share, Vestis trades at 22.6x forward P/E. Read our free research report to see why you should think twice about including VSTS in your portfolio.
Murphy Oil (MUR)
Market Cap: $5.99 billion
Operating in waters over a mile deep in the Gulf of Mexico and extracting hydrocarbons from tight shale rock formations in Texas, Murphy Oil (NYSE:MUR) explores for and produces crude oil, natural gas, and natural gas liquids from fields in North America and Asia.
Why Are We Cautious About MUR?
- Sales trends were unexciting over the last five years as its 6.7% annual growth was below the typical energy upstream and integrated energy company
- Efficiency has decreased over the last five years as its EBITDA margin fell by 11.1 percentage points
Murphy Oil’s stock price of $41.57 implies a valuation ratio of 10.6x forward P/E. Check out our free in-depth research report to learn more about why MUR doesn’t pass our bar.
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